DBS Group Research analyst Cheria Christi Widjaja has reiterated her “buy” call for Japfa in a research note dated August 24, with a target price of $1.05.
“We reiterate our “buy” recommendation on Japfa as we expect its resilient performance to continue in 2H2021 supported by its China dairy operation which will mitigate the potential short-term weakness in other operations due to Covid-19 situations,” Widjaja says.
The way she sees it, while Japfa’s Indonesian poultry operations will face near-term headwinds in 3Q2021 due to stricter movement restrictions. In addition, she expects growth from its Vietnam swine operations, which saw sales for swine fattening and swine feed grow by 29% and 43% y-o-y respectively in 1H2021, to slow down in 2Q2021 due to the worsening Covid-19 situation in Vietnam.
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Nonetheless, she anticipates the setbacks to be temporary, noting that for its Indonesia poultry operations, the ongoing culling programme will support broiler and day-old chicks prices. “Furthermore, reopening will be a positive catalyst for Indonesia poultry operations in 4Q2021,” she adds. She also expects sales volume for its Vietnam swine operations to start picking up again in 4Q2021 as the situation improves.
To that end, she forecasts Japfa’s core earnings for FY2021 and FY2022 ending December to grow 9% and 7% respectively.
Widjaja maintains that Japfa’s valuations remain attractive at 4 times EV/EBITDA and 5 times P/E for FY2021/2022. “The market is ignoring the group's long-term prospects on growing consumption of animal protein, and its geographical diversification,” she says. Widjaja sees Japfa as a food supply play that’s a bargain compared to regional peers which trade around 9 times EV/EBITDA and 15 times P/E.
In addition, she points out that Japfa has the advantage of diversification. Despite the short-term setbacks due to Covid-19 in Indonesia and Vietnam, Widjaja expects this to be mitigated by a continued strong performance from its China dairy operation.
Supporting this is raw milk prices in China which remain robust due to tightening milk supply and rising demand for pasteurised products. “Moreover, Japfa continues to expand its farming capacity, taking advantage of the tightening supply and favourable raw milk prices,” Widjaja adds.
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Her target price of $1.05 is based on a sum-of-parts valuation. “We pegged our valuation of Animal Protein Indonesia to our target price for Japfa Comfeed Indonesia at INR2,240 (21 cents), while valuations of its Animal Protein-Others and Dairy are based on EV/EBITDA on average FY2021/2022 estimates,” she explains. Her target price implies FY2021/2022 P/E of 8 times.
As at 10.31am, shares in Japfa are trading 3 cents or 4.08% lower at 70.5 cents.
